Hacker 2/HACKER2.mdf/secrets/ch25.txt

Text File | 1995-01-03 | 8KB | 138 lines

          HOW TO APPLY FOR A TAX REFUND AFTER YOU'VE FILED --
          AND HOW IT MIGHT FINANCE YOUR BUSINESS

               It is very easy to file an amended federal tax
          return, and normally you may do so within three years
          of filing the original return (or two years of paying
          the tax).
               This is not something that will cause an audit,
          but if you are the nervous sort you can wait until just
          before the three year deadline.  In that case the three
          year statute of limitations on the original return will
          have expired, and only the amendments can be audited.
          But there is really no reason to wait, and you can put
          the money to better use than the government.  (The only
          exception to this is that if you have a refund pending
          for the same year, it is better to wait until you
          receive it before filing the 1040X.)
               State returns can also be amended, but you will
          have to check with your state for details.
               It does not matter what type of form you used
          originally -- 1040, 1040A, or 1040EZ.  Perhaps you
          filed 1040EZ and realized later that there were
          deductions you failed to take.  A Form 1040X is the
          amended return to use in all personal income tax
          claims, and all you have to do is calculate what your
          original return should have been.
               1040X is also the form to use if you discover that
          you made a mistake the other way.  To take an extreme
          example, if you claimed an exemption for the family
          dog, you can correct yourself with a 1040X.  It won't
          cancel your original sin, but coming forward with the
          correction yourself can do much to alleviate the
          consequences.  (The IRS reports that an amazing number
          of children disappeared the year after the requirement
          for listing a child's social security number on the
          return to claim an exemption took effect.)
               Anything on your return can be amended with 1040X.
          So if you see items that might have made a difference
          in your last three year's tax returns, get out your
          copies and recalculate the return as if you had
          originally deducted those items.  Then transfer the
          results to Form 1040X.
               If the changes require a schedule that was not
          attached to your original tax return, you can add it to
          Form 1040X.  For example, supposing you listed
          miscellaneous income as a line item on your 1040 but
          did not treat it as a business.  You now realize that
          if you treated it as a business you could deduct the
          expenses related to it.  All you have to do is complete
          a schedule C for the year in question, include the
          results on 1040X, and send it in.
               Since the forms change from year to year, you may
          need to get a schedule, return, or instructions for the
          prior year.  The forms are available from the IRS for
          several years afterwards.  Just write to IRS Forms
          Distribution Center, Box 25866, Richmond VA 23289 and
          list the forms and years that you need.  Let them know
          if you need instructions for that year (for example,
          because you need the tax table or exemption information
          for that year).  Usually they have the old instruction
          books also.
               If the instructions for the year you need are out
          of stock at the IRS, most public libraries keep several
          year's worth of basic tax information books, such as
          the annual J. K. Lasser tax guide, which will give you
          the necessary tax table information.
               Another IRS form, number 843, covers refund claims
          that are not part of a personal tax return.  Form 843
          allows a claim back for three years for such things as
          overpayments of excise taxes, withholding taxes on your
          maid, or corporation income taxes.
               There is one area in which a refund of back taxes
          can work miracles.  Most business losses in excess of
          the current year's income (whether proprietorship,
          share of partnership, or Subchapter S corporation)
          carry back for three years -- not just forward into
          future years.  This rule also applies to charitable
          contributions that exceed the limit for the current
          year.
               In both of these cases, you can use the amount of
          deduction that you can't use in the current year, and
          get a refund of the taxes you paid in the earlier
          years, up to the point that the entire loss credit is
          used up.
               You can also do this more than once.  For example,
          you have a current year business loss which gets you a
          refund of all of the third prior year's taxes and part
          of the second prior year's taxes.  If next year you
          continue to have a loss, the second prior year is now
          the third prior year, so it hasn't been wasted.  It is
          not too late to get back the rest of the taxes you paid
          that year.  In other words, two refunds for the same
          year!  (It is not impossible to have three refunds for
          the same year -- if first filed a 1040X in the current
          year for deductions you overlooked, then in two future
          years had a business loss that you could carry back.)
          Business losses can be carried back without using an
          amended return on Form 1040X, if you use Form 1045 to
          claim the refund within 12 months after the end of the
          year in which the net operating loss or credit
          occurred.  (Corporations can do the same thing on a
          Form 1139, to get a refund on earlier corporate taxes.)
          If it is after the deadline to use a Form 1045, you
          haven't lost out.  The same carryback loss can be used
          to claim a refund up to three years back, but it must
          then be done by using Form 1040X to amend the year for
          which the refund is being taken.
               It's your money -- don't let fear of the IRS keep
          you from claiming it.  And that cash in your pocket now
          is more valuable than the possibility of crediting the
          loss towards some future year's income.
               This technique can also help finance a business.
          Supposing,  that you lost a high salaried job, as so
          many have in recent years, on which you were paying
          high income taxes.  Tax refunds could be a reason to
          start your own business immediately, even if you are
          still looking for another job.  You open a business
          which has first year losses, a fairly normal situation.
          Immediately after the end of the first year (which
          might be only a partial year if you opened the business
          late in the year) you file a 1040X to carry those
          losses back to the third prior year, thus raising cash
          to finance the business.  For a high-salaried executive
          going into his own business, timing this can be a very
          valuable part of tax planning -- you may want to cram
          all the deductions you can into that first tax year of
          business in order to get the largest possible refund
          from an earlier year for financing your business today.
          And this financing is free money -- it is taxes you
          already paid and that will be lost forever once the
          three year time limit goes by.